SEC fines Halliburton $7.5 million

Accounting change made during Cheney's tenure

August 04, 2004|By NEW YORK TIMES NEWS SERVICE

The Halliburton Co. secretly changed its accounting practices when Vice President Dick Cheney was its chief executive, the Securities and Exchange Commission said yesterday as it fined the company $7.5 million and brought actions against two former financial officials.

The commission said the accounting change enabled Halliburton, one of the nation's largest energy services companies, to report annual earnings in 1998 that were 46 percent higher than they would have been had the change not been made. It also allowed the company to report a substantially higher profit in 1999, the commission said.

The SEC did not say that Cheney acted improperly, and the papers released by the commission did not detail the extent to which he was aware of the change or of the requirement to disclose it to investors. The SEC said that Cheney had testified under oath and had "cooperated willingly and fully in the investigation conducted by the commission's career staff."

A lawyer for Cheney, Terrence O'Donnell, said the vice president's "conduct as CEO of Halliburton was proper in all respects," adding that the SEC "investigated this matter very, very thoroughly and did not find any responsibility for nondisclosure at the board level or the CEO level."

O'Donnell, a partner at Williams & Connolly in Washington, declined to answer a question as to whether Cheney had been aware of the effect of the accounting change on the company's profits.

The accounting change dealt with the way Halliburton booked cost overruns on projects. At the time, it was having large cost overruns on projects in the Middle East operated by its Brown & Root Energy Services business, which under its old accounting policy would have reduced its reported profit.

The actual change in accounting, the SEC said, was acceptable under generally accepted accounting principles, but the failure to inform investors that the change had been made - and of its effect on the company's reported profit - violated securities laws.

"At bottom, what this case is about is insuring that investors understand the numbers," said Stephen M. Cutler, the SEC's enforcement director. "If you change methodologies and don't explain that, then investors are not going to understand what they are seeing."

Halliburton's former controller, Robert C. Muchmore Jr., agreed to settle the SEC action by accepting an order to cease and desist from further violations of securities laws and to pay $50,000. Neither he nor the company admitted or denied the commission's accusations. The company also accepted a cease-and-desist order.

Gary V. Morris, who was the chief financial officer at the time the actions occurred, did not settle. The commission filed a civil lawsuit against him in U.S. District Court in Houston.

A lawyer for Muchmore declined to comment, and one for Morris did not return phone calls.

David J. Lesar, who succeeded Cheney as chief executive in 2000, said, "We are pleased to bring closure to this matter."

The commission said the $7.5 million penalty paid by Halliburton "reflects the commission's view that there were unacceptable lapses in the company's conduct during the course of the investigation, which had the effect of delaying the production of information and documentation necessary to the staff's expeditious completion of its investigation."

Until the second quarter of 1998, Halliburton had dealt with cost overruns on projects by taking a loss for the amount of the overrun unless and until the company that it was working for agreed to pay part or all of the overrun. But confronted with a large overrun on a fixed-fee project to build a gas production plant in the Middle East - the commission did not say in which country - Halliburton changed its policy so that it would record the income it thought the customer would eventually agree to pay.

That change in policy was not disclosed until March 2000, when the company filed its 1999 annual report with the SEC. The commission said that pretax profit for all of 1998 was reported at $278.8 million, 46 percent more than the $190.9 million that would have been reported under the old accounting methods.

The first three quarters of 1999 also had earnings that were about $40 million higher than they would have been, although the percentage increases were smaller.

At the time the accounting was changed, Halliburton was preparing to merge with Dresser Industries and was dealing with a decline in the company's share price partly caused by slumping oil prices. It reported a 34 percent gain in profit for the quarter, far better than other oil services companies were reporting, and Cheney said then that "Halliburton continues to make good financial progress despite uncertainties over future oil demand."

The commission said yesterday that the gain would have been just 6.7 percent without the undisclosed change in accounting policies.

In a call with analysts at the time, the company said that profit at Brown & Root Energy Services rose 40 percent during the quarter but did not disclose that the operation would have reported a loss had it not changed its accounting practices.

Halliburton's reported profits for the quarter exceeded analysts' estimates but would have fallen far short of them had the change not been made, the SEC said. Shares of Halliburton rose 8 cents yesterday, to $31.38.